Demystifying succession in a consulting engineering firm

Demystifying succession in
a consulting engineering firm
Make transitioning your equity
a smooth and painless process
CONTENTS
Succession is a complex process .................. 4
Traditional succession plans—
they may not be a viable option..................... 4
Management buyout versus external sale—
which works best for you?............................. 5
Management buyout (MBO).............................. 6
Steps to succession success........................... 7
Think opportunities, not limitations................ 8
Contact information......................................... 8
“There’s a real change in appetite among younger
professionals. They want to do great things and seize
the kinds of opportunities that go beyond salary, but
they’re not sure if they’re ready for what that means—
they may not really know what that means. Clearly,
part of addressing succession will be finding ways to
better engage this group in the firm and its future.”
– Brian Pearse, President, Opus Stewart Weir
Engineering firms know that strong
technical, operational and project risk
management are critical to business
success. “Softer” risks, however, such
as those related to succession and exit
planning, are rarely as well understood
or effectively managed. The fact is, current
consulting engineering demographics have
made succession risk something firms
should be looking at more closely.
As economic conditions have changed
over the past several decades, the number
of engineers entering the profession—and
therefore of potential successors in Canadian
firms—has fluctuated significantly. “There’s
a very real demographic distortion in the
industry,” notes Association of Consulting
Engineering Companies – Canada (ACEC)
President and CEO John Gamble. “As a
result, there are many consulting engineers
over 50 and many under 40, but comparatively
few in the 40-50 age range. That gap may
seem small, but it’s a problem when you’re
looking for a successor. It makes the exit
strategies of an entire generation more
complicated than they probably anticipated.”
On top of this, continues Gamble,
“The generation of candidates who are
available is more concerned than their
predecessors with the time and financial
commitment that ownership/leadership
require.” In other words, some are less
interested in assuming full executive
responsibility by purchasing the requisite,
and often times expensive, shares. This
generation also tends to be less loyal to
one firm, often anticipating changing jobs
and even career paths several times as they
advance their careers while satisfying a
growing range of personal aspirations
not necessarily related to work.
According to Gamble, “The implications
for succession are clear: when senior
industry practitioners want to retire
and take their equity with them, the
traditional process of having a professional
or professionals within the firm buy them
out is becoming a challenge.” Succession—
or implementing your exit strategy—is
difficult at the best of times, with a range
of emotional and often family issues
compounding the process. The added
hurdle of extracting your equity in a
straightforward manner can be an
unnecessary source of stress in an
already challenging time.
To help you get a better handle on the
options available, this paper looks at some
of the challenges all professional services
firms face; examines the pros and cons of
management buyout versus external sale/
merger; and charts the key factors your
firm should consider to improve your
attractiveness for purchase (whether
by an internal or an external buyer).
Fortunately, engineering professionals on
the cusp of retirement have options. As
globalization has opened up increasingly
large infrastructure projects that require
correspondingly large engineering firms
to handle them, merger & acquisition
(M&A) activity among engineering
firms is on the rise. This trend comes at
an opportune time for exiting professionals,
as selling to, or merging with, a larger firm
becomes a viable alternative.
On the other hand, if your firm currently
has strong ownership, and succession is a
few years away, it’s important to develop
an environment and culture where internal
succession or a management buy-out
remain viable options as well. This means
having a succession plan and a strategy
for engaging employees and building a
sustainable succession pipeline.
SUCCESSION PLANNING FOR ENGINEERING FIRMS 3
Succession
is a complex
process
Traditional succession
plans—they may not
be a viable option
Generally speaking, succession planning
is about the effective and smooth
transition of your business and wealth,
one you’ve spent building—the other
accumulating—your whole life. “The
trends we’re seeing,” suggests Kelly
Kolke, National Leader, Professional
Services, Grant Thornton LLP,
“consistently indicate that Canadian
business owners are not preparing for
the future as effectively as they could
be, lacking both general long-term
(five-years plus) business planning
and strategy, as well as specific formal
processes to support succession planning.”
Many owners prefer the traditional
succession path, where shares are
bought out by employees and junior
partners who have risen through the
ranks. Indeed, the simple prospect of
selling the business to an outside
concern can be so distressing for some
owners that they will not even consider
that option.
With so many factors involved in
determining a business successor, you
simply can’t put off the process or take
it for granted. Even if your requirements
are straightforward, planning and
execution must be considered and
those plans should be in place long
before they come into play.
“Ideally, most firms prefer to
nurture succession from within to
best maintain firm values, culture
and vision. A strong succession
plan not only enables this strategy,
it also provides an incentive for
potential and eventual successors to
perform at their best.”
– Wilfrid Morin, former
Vice President, exp
4 SUCCESSION PLANNING FOR ENGINEERING FIRMS
Despite the consequences, owners too
often wait for a triggering event, such as
illness, divorce or death, to really begin
succession planning. Instead, you should:
• create a succession plan early on and
revisit it often,
• begin looking at internal succession
candidates years before you
anticipate succession,
• ensure a transparent communication
process, especially when family
is involved,
• assist internal candidates with
preparing for the financial and other
key considerations of being an
owner, and
• prepare for post-succession issues by
broadly training key staff in all
aspects of the business.
Another important factor to bear in mind
is that there are two distinct components
to business succession: succession of
ownership (control) and succession of
management (day-to-day business
operations). Consider which one you’re
really looking to accomplish, or if it’s
both. You may want to sell the business but
maintain a strong voice in management
decisions. Conversely, you may want to
maintain ownership but step back from
the daily grind of management. Of course,
many succession plans simply involve
selling—either shares or the whole
business—and applying your extracted
capital to your retirement plans.
“Companies should share ownership
with management and employees
early on. The sense of ownership
really encourages people to ‘turn
out the lights’ and align employee
behaviour with firm success. It’s a
great way to begin building loyalty
without fully ceding control.”
– Wilfrid Morin, former Vice President, exp
Management buyout versus external
sale—which works best for you?
Typically, a consulting engineering firm
will have an internal succession plan in
place outlining a mechanism for retiring
partners to leave the practice and extract
their capital. This has the advantage of
continuity of vision and culture, offering
the retiring partner a sense of confidence
that the business will run with the same
values and goals as in the past.
However, when this is not possible, two
other options are available: either the owners
begin looking for a desirable company to
merge with or to purchase the firm, or
sometimes the current management team
initiates a management buyout. Regardless
of which of these takes place, the task of
preparing the business to sell for the best
value should begin long before succession
becomes a reality.
Owners looking at either of these options
should carefully consider the advantages
and disadvantages of each:
External sale/merger (M&A)
Merger and acquisition can be a very
successful exit strategy, but it requires
careful planning. For example, depending
on the size and type of the business, it
might be more beneficial to the seller to
seek out a strategic buyer, which could
include competitors in local or international
markets, or larger companies looking to
add a particular service/product offering
or expand into particular geographic areas.
In some cases, the purchase price can be
more aggressive as strategic partners may
be willing to pay more for the company
as there may be value to them in taking
out a competitor, adding synergies by
streamlining staff or processes, and/or
adding new products and services.
“Share numbers and expertise with
management as soon as possible; it’s
important to have more transparency with
potential successors regarding the
business side of the business. Include
visibility into marketing, HR, cash flow
and the firm’s financial strategy.”
– Andrew Steeves, Senior Strategic Advisor,
exp; Engineer in Residence at University of
New Brunswick
Some other factors to consider:
• Pro – An external buyer may help the
owner exit the business faster, as their
management team is already in place
and ready to take over,
• Pro – The deal is often clean and simple,
that is sometimes, does not involve a
vendor take back, third-party financing,
etc.; and
• Con – The potential loss of a long-held,
valued corporate culture (and possibly
even the corporate name) may impact
the owner’s sense of legacy and may
make some clients/suppliers uneasy.
SUCCESSION PLANNING FOR ENGINEERING FIRMS 5
Management buyout (MBO)
In this type of transaction, current
management of the company offer to
buy the controlling shares of their employer.
Similar to traditional share sale, this may
be more comfortable for the existing
owner(s) as it supplies the sense that their
company, legacy and vision will continue.
There is also more opportunity for owners
to stay on in a different role or phase out
at their own pace. Moreover, the transitional
security of the management buyout makes
it easier to find equity sponsors to help
with the purchase. It’s important, however,
to still conduct due diligence and get
external input with respect to fair market
value to ensure everyone involved gets
their fair share.
In some cases, the management buyout
option may be limited by the demographic
challenges noted earlier. However, as
Opus Stewart Weir President Brian
Pearse notes, “Overcoming conflicting
generational perceptions to develop and
execute a successful succession is really
nothing that communication can’t solve.
You need to emphasize the value and
opportunity firm ownership carries with
it. It’s important for the older generation
to share lessons learned, express their
6 SUCCESSION PLANNING FOR ENGINEERING FIRMS
concerns and suggest solutions. At the
same time, they need to foster loyalty
and leadership by engaging the younger
generation, asking them their ideas and
genuinely considering their issues.”
Some other factors to consider:
• Pro – Client and supplier familiarity
with management potentially reduces
risk for the buyer as well as providing
comfort to current employees, suppliers
and customers alike,
• Pro – A wide variety of financing
options are available (debt, subordinated
debt, vendor take back (VTB), private
equity, etc.); and
• Con – The seller may not realize
the best price under this scenario as
managers have their own sense of fair
market value and usually don’t have
as deep pockets as other potential
purchasers.
“While both are important,
management succession and
ownership succession are two
very different things. Management
is, in fact, the bigger issue, as
faith in management is what
drives investment, maintains the
confidence of existing clients and
preserves business continuity during
and following the transition.”
– Andrew Steeves, Senior Strategic
Advisor, exp; Engineer in Residence at
University of New Brunswick
Steps to succession success
What should consulting engineering firms do now to improve their attractiveness for sale/takeover—
whether by management or an external buyer?
Try asking the following sets of
key questions:
1
Financial considerations –
getting your house in order
• What is my business worth?
Obtain a valuation that shows what
your business is worth and whether
it’s enough for your retirement plans
• Has the company done everything
it can to maximize value by:
-- Enhancing reputation—business
value must go beyond the
owner’s name
-- Minimizing personal goodwill—
the business can’t depend solely
on owner involvement to be
successful
-- Limiting dependency on key
clients, employees and suppliers
-- Eliminating discretionary expenses
-- Streamlining operations to minimize
costs and increase profitability, and
-- Minimizing risk by:
• Increasing your asset base,
• Establishing long-term,
contractual client relationships
throughout the company, and
• Investing in robust IT systems
and automated processes
2
Tax considerations –
protecting yourself
• What are the tax advantages/disadvantages
of selling assets vs. shares?
• Am I far enough along in my succession
planning given that the sale may
significantly impact tax outcomes?
3
Succession planning
considerations –
protecting your investment
• Do I have strong middle
management that can take over?
• As owner, what is a reasonable
transition time to offer the buyer?
• What should my role be during
transition? What do I want it to be?
Am I ready emotionally to sell
my business, be an employee,
accept a reduced role in decision
making, etc.?
4
Financing considerations –
extracting your capital
• If I have difficulty finding
a buyer, should I consider
refinancing and using the
capital in other ways?
-- What does my balance
sheet look like?
-- Can my cash flows
sustain taking on debt?
-- How do I raise this debt?
• If I sell my business, how
does a VTB deal work?
More and more deals today
have a VTB component—
is it right for me?
• What am I willing to pledge
as security?
SUCCESSION PLANNING FOR ENGINEERING FIRMS 7
Think opportunities,
not limitations
Owners and leadership teams at consulting
engineering firms in Canada face a unique
situation. A combination of demographic
and generational change has made the
succession process they traditionally
embrace more difficult to execute. As a
result, more firms are exploring management
buyouts or selling to/merging with larger
companies. The point is, despite the
challenges, opportunities and options
remain for senior partners and owners
looking to retire.
8 SUCCESSION PLANNING FOR ENGINEERING FIRMS
Whether retirement is imminent or
whether succession is a long-term
prospect that you know you want to
start planning for, you want to extract
your capital in the way that best serves
you, your family and the business.
The right third-party advice can help
you streamline the process and ensure
you consider the full range of issues and
options available.
Contact information
Kelly Kolke
Partner, National Profesional
Services Leader
Grant Thornton LLP
T +1 902 896 2535
EKelly.Kolke@ca.gt.com
John Gamble, CET, P.Eng.
President & CEO,
Association of Consulting Engineering
Companies-Canada
T +1 613 236 0569 ext. 201
Ejgamble@acec.ca
About Association Of Consulting Engineering Companies – Canada (ACEC)
The Association of Consulting Engineering Companies – Canada (ACEC) represents 450 companies in Canada
that provide professional engineering services to both public and private-sector clients. These services include
the planning, design and execution of all types of engineering projects as well as providing independent advice
and expertise in a wide range of engineering and engineering-related fields. ACEC member companies have a
direct influence on virtually every aspect of the economic, social and environmental quality of life in Canada.
ACEC is the national voice of the consulting engineering sector on business, public policy and regulatory issues.
Visit www.acec.ca
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